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Monte Paschi Seen Posting Loss, Handing Stake to Government

Banca Monte dei Paschi di Siena SpA (BMPS), the world’s oldest bank, may become the first Italian lender since the 1990s to have the government as a shareholder as the company weighs further goodwill writedowns.

Monte Paschi, which is borrowing 3.4 billion euros ($4.2 billion) by selling bonds to the state, must give shares to the Italian Treasury in lieu of interest on the debt if it reports an annual loss, according to a law approved this month.

Brokerages including Kepler Capital Markets and Credit Agricole Cheuvreux SA estimate Monte Paschi, Italy’s third- biggest bank, will report a net loss of more than 1 billion euros in the second quarter on writedowns, a shortfall that would lead to a loss for 2012. The bank, which publishes results on Aug. 28, said in June that a review of goodwill may lead to “material” impairments in first-half earnings.

“Very likely the bank will hand a stake to the Treasury at this stage,” said Fabrizio Spagna, managing director at Axia Financial Research in Padua, Italy. “I expect, as suggested by Paschi’s executives, new writedowns on their intangibles, a move to skip paying interest on aid at a time when the bank is struggling to make money and raise liquidity.”

Fabrizio Viola, who became chief executive officer in January, turned to the state for funds after failing to find private investors to close a 3.3 billion-euro capital shortfall identified by the European Banking Authority. Europe’s banking regulator instructed the region’s biggest lenders to reach a 9 percent core Tier 1 capital level by the end of June.

Second Time

Italy sold bank holdings in the 1990s as it sought to improve lenders’ profitability and foster consolidation. The government is now seeking to sell assets to help cut the euro- area’s second-largest debt burden. For Monte Paschi, the stock payment to the state may dilute other investors and intensify government control.

Monte Paschi’s aid request is its second in three years, after it obtained 1.9 billion euros in 2009 through the issue of so-called Tremonti bonds. That debt will be converted into the new securities and forms part of the total requested.

While the terms of the new bonds haven’t been defined, the Siena-based bank expects to pay a higher interest rate than the 8.5 percent on the Tremonti bonds, Viola said on June 27. The government has 30 days from the law’s publication to set terms.

In case of losses, the shares will be issued to the Treasury at Monte Paschi’s book value, according to the law. The bank’s stock trades at about 20 percent of that level.

“We forecast 640 million euros of capital issued to the government due to two years of losses” in 2012 and 2013, Aldo Comi, an analyst at Cheuvreux, wrote in a July 5 report. The Treasury would hold about 7 percent of the bank’s capital in 2014, based on Comi’s forecast.

Strategic Choice

“The goodwill writedown may be seen as a strategic choice, to save money,” said Spagna. “The bill will be paid by the state and taxpayers. Instead of cash, Italy will get shares at five times their market price.”

A Monte Paschi official declined to comment.

The bank, which fell to a record low of 15.68 cents last month, posted an 18 percent gain, its biggest in 13 years, on Aug. 17 amid speculation its main investor, Fondazione Monte dei Paschi, will reduce its holding, opening the way for a shuffle among shareholders.

The stock rose 10 percent to 23.79 cents, valuing the firm at 2.9 billion euros as of 9:34 a.m. in Milan. That compares with the company’s book value of 1.05 euros a share.

Payment Missed

The lender skipped an interest payment of about 160 million euros on the Tremonti bonds in 2011 because the rules for those securities permit banks to avoid interest in case of losses.

Monte Paschi has residual goodwill of about 2.2 billion euros after 4.5 billion euros of writedowns last year related to acquisitions, including its purchase of Banca Antonveneta SpA. The bank posted a 5 billion-euro loss in 2011.

The lender, which was founded in 1472, paid 9 billion euros to purchase Padua-based Antonveneta from Banco Santander SA (SAN) in 2007, just before the onset of the global credit crunch. Goodwill represents the excess purchase price above fair market value that a company pays in an acquisition, and typically reflects the value of intangible assets such as a brand name.

“As regards 2012, a coupon miss appears almost inevitable, with Monte Paschi once more reviewing goodwill positions,” said Ronny Rehn, an analyst at Keefe, Bruyette & Woods in London.

Monte Paschi, which expects revenue to fall 1 percent through 2015, is selling a 60 percent stake in its northern Italian unit, Biverbanca, for as much as 223 million euros, closing 400 branches and eliminating 4,600 jobs to curb losses.

Banks in Italy are under scrutiny from investors and regulators as Europe’s sovereign debt crisis threatens to engulf the country. Spain asked for as much as 100 billion euros of European loans on June 9 to bail out its banks, which have been pummeled by real estate losses and a worsening recession.

Monte Paschi’s bailout doesn’t signal wider difficulties among Italy’s banks, said Angelo Drusiani, who manages about 3 billion euros at Banca Albertini Syz & C. in Milan. “Italian lenders are definitely in better shape than their Spanish counterparts,” he said.

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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